August 2016 – Income Fund update

Another month has come and gone. I’m taking a little time out from updating the UK Dividend Champions list in order to post my August Income Fund update. Click on to read how I fared this month.

Dividend Income

Total income from my Income Fund in August was $393, a 1.5% increase compared to the $387 I received this time last year in August 2015. I’ve not been putting any new money into stocks which pay dividends in August over the last year, so a small increase here is expected.

The following chart shows the cumulative dividend income so far this year compared to previous years.

With total income of $4,722 so far this year, I’m still a comfortable 18% ahead of last August’s total ($3,987). I fell back into step with last year though as this month’s total doesn’t beat last September’s total.

Income breakdown

The chart below shows a breakdown of the $393 I received this month.

Individual stocks contributed $101.55 or 26% of the total this month. The two bond funds (VWEAX and VWESX) paid a total of $287 or 73%. Finally interest from the Income Fund cash reserves made up the remaining $4.

Dividend income from stocks

10 stocks paid dividends this month as detailed below.

Last August my individual stocks paid $88 from 9 stocks. This year is only different due to a different UPS payment schedule as they usually pay in September, although I also bought more LNT in November last year.

I’ve included the dividend growth of each stock on a 1-year trailing basis in the table. Dividend growth is calculated from the last 4 payouts compared to the 4 before that. The yield calculations are annualized, or extended forward a year, based on the current dividend payment against the market value.

On average, dividends of the stocks paying dividends this month have increased by nearly 6% over the last year. T, PG and VZ have the lowest dividend growth at under 3%. Top performers are RTN with a 10% increase and AXP at over 8% increase over the year.

Income from funds

I received income from the two Vanguard bond funds this month as shown below.

The two bond funds pay their distributions monthly and are taxed as normal income – not the lower qualified dividend rate that dividends receive. Income decreased a little since they’re bonds and are linked to interest rates. Together both bond funds had a total of $41 more income at this time last year compared to this year. Despite the decrease they still pay a good yield (4+%) and I’m still reluctant to get rid of them as I think they’ll help provide additional income when interest rates rise.

Asset Allocation

Here’s my Income Fund asset allocation as of August 2016.

Compared to last month, the asset allocation remains unchanged. Overall the Income Fund is at a 70:30 Stocks:Bonds allocation (counting cash as bonds).

Detailed Allocation

The following table shows the detailed asset allocation.

I’m still slowly rebalancing to my target asset allocation. My long term plan is to limit individual stocks to 10% of the total (it’s at 16% currently), but I’ll be achieving this for the most part by adding new capital to the mutual fund components.

Likewise the bond funds are targeted for a 15% total weight; VWEAX is overweight here but it’s slowly shrinking (~ 0.4% a month) as I direct new money into stocks.

Fund Purchases & Sales

I added $2,300 of new money to the Fund this month; all leftover income that isn’t used for Living Expenses, Savings and my Emergency Fund is transferred into the Fund’s cash account first, and I then purchase investments from the Fund’s Cash account.

This amount includes an automatic monthly $1,800 purchase of VHDYX ($900), VIHAX ($900) and Cash ($500). I also exchanged $1,400 of Fund Cash into VHDYX since it had under-performed compared to VIHAX.

I transferred $540 from Fund Cash into my Living Expense account. This is an automatic payment and represents about 13% of my Living Expenses that my Fund pays every month.

Portfolio Performance

My Income Fund increased in value from $258,425 to $260,805 this month, a new record high, helped mostly by the $2,300 of new capital that I added.

The new capital ‘purchased’ 21.5921 shares of my Income Fund and the end of month share price increased by $0.03 to $106.2081, the highest it’s been. This represents a monthly increase of 0.03%.

Date

Price ($)

Change

YTD Change

Value

Cost Basis

VTSAX YTD

Dec-15

100.0000

0.00%

0.00%

215,011.28

215,011.28

0.00%

Jan-16

97.9494

-2.05%

-2.05%

212,642.17

217,045.51

-4.18%

Feb-16

97.5142

-0.44%

-2.49%

221,690.30

227,034.95

-4.22%

Mar-16

101.9418

4.54%

1.94%

236,992.29

232,228.37

2.04%

Apr-16

102.6669

0.71%

2.67%

242,361.27

235,934.98

2.70%

May-16

102.7813

0.11%

2.78%

245,254.41

238,495.46

4.52%

June-16

103.8416

1.03%

3.84%

250,445.28

241,159.16

4.32%

July-16

106.1726

2.24%

6.17%

258,424.97

243,459.16

8.44%

Aug-16

106.2081

0.03%

6.21%

260,804.54

245,759.16

8.74%

I’ve been tracking my fund performance like an Index Fund since the beginning of the year and the underlying monthly investment performance in June was 0.03%. I’m comparing this price performance to VTSAX which gained 0.3% in June, excluding dividends. My Year to date increase is 6.21%, compared to 8.74% for VTSAX.

The growth percentages only reflect price changes, not total return. Total Return is higher since I pay a monthly distribution (dividend) from the Income Fund, which reduces the growth percentage because fund assets decreased by the distribution amount. A Total Return calculation would include the dividend plus the capital growth of the shares purchased with that dividend.

Comparing performance

Just for fun here’s a “growth of $10,000” chart with my Income Fund compared to VTSAX, (this data excludes re-invested dividends so it’s a growth of price, not total return).

VTSAX has a different composition than my portfolio so I expect different results. It contains US-only stocks and includes small-cap stocks whereas my Income Fund contain US large-value stocks, international value stocks and (volatile) US bonds. Over the long-run a 100% stock allocation should always beat a stock/bond allocation, but I should expect lower volatility because of the bond component. I’ll add dividend payments to this chart too once more have been paid out – my fund’s dividend payments are much smaller than VTSAX‘s so I expect my total return to be lower.

Does the relative performance matter? Not to me; it just puts a boundary on the results to put it into perspective. VTSAX, being a total stock market fund, indicates the average performance that can be achieved by the US Stock Market. Average doesn’t mean bad in this case – even average performance beats the majority of active investors.

Outlook

VHDYX continues to fall under its target 2:1 ratio with respect to VIHAX so I’ll buy proportionately more VHDYX in September to balance it out. Trying to keep the funds at their target ratio allows me to put more money into whichever fund performs worse (is ‘cheaper’) each month.

I’m continuing to withdraw $540 each month from Fund Cash which goes towards my Living Expenses. Although I’m ‘withdrawing’ money, it just means that I can put more of my paycheck towards investing. This is really the same thing (money is fungible after all) but it gives me practice in managing the Fund Cash flows since my paycheck will stop when I reach Financial Independence.

I want to keep as little cash in the Fund as I can but I need to keep a certain buffer for smoother cash-flow. I’m still using a little Cash to make additional purchases from time to time but I’m being a bit more careful with supplemental purchases as the cash balance drops.

Income for September will be a lot higher as the two stock funds that I’ve been putting most new money into will pay their dividends. I’m also considering to pay myself a raise starting next month and increase the amount I’m withdrawing monthly from the Fund, so that’s something to look forward to.

Summary

Another solid month of income and I’m one step closer to FI although it still looks very far away. I’m on track to easily reach $8,000 dividend income this year and beat my goal of $7,800.

How was your August? Are you one step closer to Financial Independence?

Hi DFG,
Congrats on keeping ahead in August – hopefully September continues the run for you! I’m still slowly spending my investment cash down – I’m not holding on for a sudden drop but more dollar-cost averaging.
Best wishes,
-DL

I am very new into investment and I am very impressed with your goals and achievements till date. I am still trying to gasp all the info and advices on your blog. They are great insight for high income investments.

I am a UK resident and would like to know whether do you know if there is any data on income/dividend bond/ETF investments in UK ?

Is it possible for me to invest in the US bonds and ETFs such as from Vanguard ?

I see from your blogs that the dividends in US are paid monthly for bonds/ETFs and quarterly for stocks. In UK for stocks the dividends get paid twice a year. So I don’t see any way to get income on a monthly basis here in UK.

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